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Jun 26 2008

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Middle East economy: Surplus wealth

Qatar has caught the headlines in the world financial press for two days running, first with its selection of NYSE Euronext to help it to develop its stock exchange, and then with its bid to acquire up to 10% of Barclays Bank . These moves illustrate the vigour with which Qatar and its fellow Gulf Co-operation Council (GCC) member states are pursuing the parallel objectives of creating new financial centres in the region and building up their global assets. With the oil price continuing to set new record highs and the price of gas—Qatar's principal export commodity—following suit, this trend is likely to strengthen.

Accumulation

The aggregate current-account surpluses of the GCC member states are forecast to total some US$600bn in 2008 and 2009, according to the Economist Intelligence Unit, based on assumed oil prices of US$120/barrel in 2008 and US$110/b the following year. Most of the risks to these oil price assumptions are on the upside, which suggests that the GCC external-account surpluses could easily be considerably higher. Even if the combination of extra Saudi oil output and a marked slowdown in global demand were to push oil prices down, the GCC's accounts are still likely to be heavily in the black. In our core forecast, the aggregate current-account surplus is equivalent to more than 30% of GDP.

Strong exports, relatively expansionary fiscal policies and robust private consumption will keep real GDP growth at an average of almost 8%. However, the GCC's economic prospects face a growing threat from the relentless rise in inflation, which is expected to average 11.7% this year, with only a modest reduction next year, on the assumption that that increased housing supply will ease price pressure in the real-estate sector and that a stronger dollar will take some of the sting out of imported inflation. At the same time, government measures aimed to mitigate the effects of inflation—notably increases in wages and subsidies—will create their own inflationary pressures over time.

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The drive to develop the regional financial services industry and to increase the stock of overseas assets is part of an overall strategy of diversification. Qatar, which has only recently started to reap the benefits of its massive investment in becoming the world's largest exporter of liquefied natural gas (LNG), is making strenuous efforts to emulate, and even surpass, the United Arab Emirates (UAE), where the Abu Dhabi Investment Authority (ADIA) has been long established as the doyen of sovereign wealth funds and Dubai has set a series of benchmarks in the development of the services sector.

The Qatar Investment Authority (QIA) has been provided with the wherewithal to build up a portfolio of assets that will ultimately generate sufficient income to cover most of the country's current budgetary expenditure. QIA 's initial record has been patchy, with persistent reports of friction between its chief executive, Sheikh Hamad bin Jassem al-Thani (the prime minister and foreign minister) and one of its main investment advisers. QIA suffered setbacks in its bids for J Sainsbury, EADS and Thames Water, and some of its investments in the healthcare sector are reported to have run into difficulties owing to the high level of debt involved. QIA has shown a surer touch in the financial sector. After having acquired a small stake in Crédit Suisse, the Qatari SWF is poised to become the largest single shareholder in Barclays Bank as a result of its participation in a £4.5bn recapitalisation. The Barclays deal looks like a good piece of business for QIA , as the price it will be paying is less than half of that forked out by Singaporean and Chinese investors for stakes that they acquired in the bank last year.

Hub rivalry

The tie-up with NYSE Euronext is just the latest episode in a long-running saga of rivalry between Qatar and Dubai in their efforts to establish themselves as regional hubs for trading in equities and derivatives. Last year Dubai Borse—which holds the Dubai government stakes in the Dubai Financial Market and the Dubai International Financial Exchange (DIFX)—came out ahead in a tussle with QIA for dominant stakes in the London Stock Exchange (LSE) and in the OMX (the Nordic exchange). Although QIA did finally emerge with 20% of the LSE, Dubai secured a valuable partner for the development of its trading platform when the combined Nasdaq OMX group took a one-third stake in DIFX. Qatar has now matched that move by bringing on board NYSE Euronext to perform a similar function on the Doha Securities Market.

The challenge that both exchanges now face is to generate significant trading volumes. The Doha market remains primarily a local affair, and the DIFX, which had aspirations to attract listings from all over the Middle East, Asia and Africa, has had an uphill struggle since its launch in 2005, although trading grew considerably last year, reaching US$1.45bn, compared with only US$26.3m in 2006.

SOURCE: ViewsWire

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